We’ve all heard of the “death rattle,” the last gasp from a lost soul’s lungs. Sometimes, we seem to hear it from the companies in which we invest. Revenue dries up. Margins contract. Profits evaporate. All these signs suggest that their condition is worsening -- a financial death rattle, if you will.
Stocks in sick bay
Don’t assume that all such companies are goners. Some will barely cling to life, while others will make a full recovery. Here, though, we’re seeking companies that have all but given up the ghost.
For help, we’ll turn to the clever coroners at our 115,000-strong Motley Fool CAPS community, where members give the thumbs-up or thumbs-down to more than 5,500 stocks. Data shows that newly minted five-star stocks offer the best opportunities for investors, while the lowest-rated companies fared the worst. We’ve unearthed a handful of stocks that look like they might be headed six feet under. You might want to avoid these; they’ve garnered no more than the lowest one-star rating.
Then we’ll check out some quick tests for liquidity -- the current ratio and quick ratio (also called the “acid test” ratio), which give us an idea of a company’s ability to pay its bills, and the Altman Z-Score, which suggests companies in danger of bankruptcy. Companies scoring 3.00 and above are considered safe, between 2.70 and 2.99 are “yellow flags,” between 1.80 and 2.70 have a good chance of going bankrupt within two years, and those with scores below 1.80 mean the Crypt Keeper is waiting.
Here’s today’s list. The question is, are these companies only mostly dead, or have they already given up the ghost?
|
Stock |
Current Ratio |
Acid-Test Ratio |
Altman Z-Score |
|---|---|---|---|
|
American Superconductor |
3.6 |
3.0 |
12.16 |
|
Cablevision |
0.8 |
0.5 |
0.64 |
|
Compania Cervecerias Unidas |
2.1 |
0.9 |
3.37 |
|
Corinthian Colleges |
1.7 |
1.2 |
5.08 |
|
Great Wolf Resorts |
0.3 |
0.2 |
0.05 |
Sources: Motley Fool CAPS; Capital IQ, a division of Standard & Poor's.
We obviously don’t know whether these companies are headed six feet under, so don’t short them based on their appearance here. Moreover, some companies don’t neatly fit into the Altman Z-Score scale.
Yet our primary screen is for those stocks that CAPS investors have marked down to one-star status, meaning they are possibly destined to seriously underperform the market.
A market disconnect
While three-quarters of the investors on CAPS think American Superconductor will outperform the market, when we look at All-Star members, we see that they're very nearly evenly divided. Top-rated member ratberto wrote last May that the energy technology company was still a good underperform candidate, giving several reasons:
This thing just sucks money from its investors. It loses money, has negative cash flow ... [and] $410 million in negative retained earnings which is almost four years of revenue...BUT it has a sexy name with "super" in it and now wind, so there are still institutional investors like Fidelity and Vanguard.
Ever since Cablevision suggested back in July that it was seeking ways to boost shareholder value, speculation has centered on some strategic buyer coming in and saving the cable operator -- even as its shares have been rising since the beginning of the year. Yet when Lehman Brothers collapsed and Merrill Lynch
Cablevision Systems continues to add new services as well as getting a corner on the market in several key areas. With the addition of digital tv cablevision will be hot for a long time to come
Rattling the cage
Are these companies doomed to drag their investors into an underworld of underperformance? Or will they be resurrected to stalk the markets once again? It pays to start your own research on these stocks on Motley Fool CAPS. Read a company’s financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock’s CAPS page. Sign up today, absolutely free, and let us know whether you think the Grim Reaper’s at the door.
